Bill Bonner's Diary

The Fed Has the Shakes

BALTIMORE, MARYLAND – Another big down day for the Dow. Yesterday, the index took another 2% hit… But, in keeping with our Advent Season optimism, if wealth is a burden, investors must have breathed a sigh of relief; they had $600 billion less of a burden at the end of the day than at the beginning of it.

And today, all eyes turn to the Fed. From a low of 6900 on the Dow in March 2009, to a high of 26650 on September 20, 2018, the geniuses at the Fed created this bubble. Now, they own it.

But what will they do with it? Will they take away even more of the burden of wealth with one final rate hike as a Christmas present?

Economic Magic

Central banks have no economic magic. No financial panaceas. No money miracles. They can’t really make an economy run better.

They can’t raise real wages or increase the wealth of a society. They don’t produce anything of value. They don’t provide any service that you would willingly pay for.

All they can do is manipulate the amount of money and credit. That is, they can mislead people about how much credit is available… and at what cost.

For example, they can lower the price of credit by cutting rates… encourage people to borrow… and cause a credit boom on Wall Street. That increases the amount of money in the system. But every extra penny is borrowed, which also increases the amount of debt.

Alas, it has no way to increase the real output of Main Street… which is how debt is paid. Debt goes up much faster than income; that’s the story of the last 30 years.

And today, debt – which caused the crisis of 2008-2009 – is higher than ever. From student debt to corporate debt to government debt – it is all setting records. Bloomberg:

U.S. student loan debt outstanding reached a record $1.465 trillion last month and one particular set of borrowers is having a hard time paying back their loans, according to a Bloomberg analysis of student loan securitization data. This debt is raising fiscal risks.

“Over 90% of student loans are guaranteed by the U.S. Department of Education, meaning that if a recession causes a rise in youth unemployment and triggers mass defaults, this contingent liability could prove burdensome for the U.S. government budget,” said Paul Della Guardia, economist at the Institute of International Finance…

Thanks to a little-known Social Security contract, they will get money deposited directly in their accounts… No matter what happens to Social Security. It’s all thanks to this money that comes from the private sector.

Presidential Debt

And now the students and ex-students, businesses, households, and the government all depend on the Fed’s low interest rates. One famous person who depends on low rates is POTUS himself.

Mr. Trump is, after all, a leveraged real estate developer, as well as a politician and reality TV star. Bloomberg News reports that the president is already paying the price of higher rates:

President Donald Trump has repeatedly attacked Federal Reserve Chairman Jerome Powell’s interest-rate increases as a drag on U.S. economic growth. They’re also cutting into his own fortune.

Every time the Fed raises rates, Trump’s payments on some $340 million in variable-rate loans go up. Since his January 2017 inauguration, the Fed’s steady rate hikes may have added a cumulative $5.1 million a year to his debt service costs, according to a Bloomberg News analysis of the president’s financial disclosures and property records.

Two years ago, the Fed decided to stop making its Mistake #1 (keeping rates too low for too long) and switch to Mistake #2 (raising rates in anticipation of the next crisis… and thereby triggering the crisis). Then, at least, it would have some rates to cut when the crisis came… and it could then make Mistake #3 (cutting rates in a panic).

And that is the real question for today. There is no crisis, yet, so there are only two choices: Will the Fed stick with Mistake #2 or go back to Mistake #1?

If you’ve been following our Diary, you know that we’ve made an important prediction: The Fed will never voluntarily allow rates to return to normal.

It can’t let rates go back to normal because it has spent the last decade training the economy to live on abnormal ones. Now, like a patient on life support, the heart would stop beating if the Fed were to pull the plug.

Again, looking on the bright side, that is what should happen. The Fed created a debt-drenched monster; it should have the courage to bury it.

But that’s not going to happen. The Fed may not want to cave in to Mr. Trump’s demands. But it definitely doesn’t want to watch the Dow go down 1,000 points, either.

In fact, were policy makers to follow through with their widely expected hike Wednesday, it would be the first time since 1994 they tightened in this brutal a market. Right now, the S&P 500 is down over the last three, six and 12 months, a backdrop that has accompanied just two of 76 rate increases since 1980.

Recently, several high-ranking officials and U.S. businessmen met to discuss a new “gold standard” – backed by 21st Century technology. Already, 142 U.S. cities have opened up to this radical idea. And Texas Governor Greg Abbott has moved part of his savings into a “prototype” for the “new gold standard.”

One man involved in the discussions reveals what he’s learned, along with a potentially explosive opportunity – the same kind of opportunity he used to bag a 14,354% winner.

Data Dependent

Most likely, rates will go nowhere today. Instead, the Fed will put the QT (quantitative tightening) program on pause, “to give it time to assess the incoming data.”

The announcement will sound reasonable. It will be greeted by Donald Trump and investors with considerable relief. The Dow should head up.

But the “data dependent” path is complete BS. It is like an alcoholic who gives up booze for “as long as his nerves don’t start acting up.” He’ll be back on the sauce within hours.

The Fed has practically fallen off the wagon already. It may or may not simply pause today. But now or later, stocks will continue to fall. And then, the Fed will pick up the bottle and go on another credit bender.

Regards,

Bill

MARKET INSIGHT: WALL STREET IS SINGING BILL’S SONG

By Joe Withrow, Head of Research, Bonner & Partners

The S&P 500 just hit a 14-month low…

That’s the story of today’s chart, which tracks the S&P 500 from January 2017 through today.

As you can see, the S&P 500, often used as a barometer for “U.S. stocks,” has fallen 13% from its all-time high in September.

And with yesterday’s sell-off, the S&P is back to where it was in October 2017. In other words, 11 months’ worth of gains were wiped out in less than 90 days.

Bill has been sounding the alarm on stocks for years. As our editor has written many times, the Fed’s ultra-low rate policy allowed debt to accumulate to unprecedented levels. Now, with rates on the rise and government deficits expected to exceed $1 trillion in the years ahead, all this debt will be a long-term drag on growth and future earnings.

And in the face of falling stocks, Wall Street is starting to catch up.

I think this lasts a long time. It has a lot to do with the fact that, I believe, that we’re in a situation that is … highly unusual – that we’re increasing the budget deficit so spectacularly so late in the cycle while the Fed is hiking interest rates.

And Gundlach proceeded to explain why we are in this situation:

The problem is that the Fed shouldn’t have kept them (rates) so low for so long. The problem is, we shouldn’t have had negative interest rates like we still have in Europe. We shouldn’t have had done quantitative easing, which is a circular financing scheme.

Sound familiar?

– Joe Withrow

FEATURED READS

Trump’s War on the FedAs Bill wrote above, POTUS has a lot to lose from rising rates. And the president isn’t lying down for the Fed’s rate hikes…

What to Buy When the Market Goes NutsAs Joe Withrow mentioned above, U.S. stocks have been plummeting since September. In addition to holding gold, here’s another strategy investors should consider…

More Help for FarmersThe ongoing trade war has hit American businesses hard. American farmers, specifically, have been feeling the pain. With tariffs on key crops like American soy, the agricultural industry is struggling to make ends meet. But the federal government has a solution: more handouts.

MAILBAG

Today, a mixed mailbag: Talk of Trump… congratulations on Bill’s newest grandchild… and what’s Bonner got against the state of Florida, anyway?

Good lord, Bill! Why don’t you just alarm the whole left side of the country because that’s all who will take your email to heart. You are an anti-Trump person, I get that, but global warming has NOT been proven. Too many folks have a way too short outlook on life and Mr. Trump is doing his very best to make America a place we can ALL be proud of. Mexico will indeed pay for that wall just with the reduced illicit drug trade. I WANT our borders secure and I cannot believe you do not. Even the other Democrats were… once upon a time. Everyone is so taken by the “promise” of socialism they are falling over one another to bring it here.

– Mike R.

Hi Bill. Enjoy the arrival of your newest grandchild, we have our first and second on the way!

– Stephen B.

Bill, you were pretty harsh on Florida… broken down, on our last legs and all, young and vibrant, or waiting to die. Ouch. Don’t get all curmudgeon on us. We may be a sunny place full of shady people, but absent the terrain and the sun, so is everywhere else. Why do so many come here after they made their money? I’d love to answer that myself. Don’t retire, folks.

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